Economics and patents
Encyclopedia
Patents are legal
instruments intended to encourage innovation
by providing a limited monopoly
to the inventor (or their assignee) in return for the disclosure of the invention. The underlying assumption being innovation is encouraged because an inventor can secure exclusive rights, and therefore a higher probability of financial rewards in the market place. The publication of the invention
is mandatory to get a patent. Keeping the same invention as a trade secret
, rather than disclose by publication, could prove valuable well beyond the time of any limited patent term, but at the risk of congenial invention through third party.
as a whole. The benefits of new results, once the research
is publicly known, are available to the whole economy in the relevant field, thereby bringing advantages to all parties in that field, though reducing the direct return to the party performing the pioneering research. This reduces economic incentive for a party to conduct research and innovate.
The effects of patents on a given market may vary widely according to the type of market, and whether there are other barriers to entry (e.g., business methods versus regulated medications).
Even in socialist monopole economies, the adherence to international patent laws was or becomes strict, as the effect is reciprocal for public economy, as soon as the level of technology development in these economies creates comparable advantage.
The grant of a patent provides the inventor temporarily with an exclusive legal right, thereby securing a means to redeem the costs of research (by charging a higher price for its invention or by license fees from others who wish to practice it). Invention
is slightly advanced as people are encouraged to research and invent by the individual financial rewards of doing so.
A patent is an exclusionary right - preventing others from entering the market - and so its effect may be to increase the patent proprietor's income from that market. The major economic effect is the exclusivity period of the patent rights, when exploitation pays back for the enterprise that funded research and development
. However, patenting alone does not guarantee for marketing success.
The right to exclude others from entering market with copies is, however, potentially extremely valuable as it can mean total exclusivity in that market for the duration of the patent (generally 20 years from filing). For example, worldwide sales of a patented pharmaceutical can be millions of dollars per day, whereas the generic equivalent sells for less than half the price. A good example of the financial rewards available to the small business from excluding large competitors from a market is the success of the Dyson
vacuum cleaner.
Income improvement from a patent is difficult to measure. One may attempt to measure the difference in price of an "improved" product patent, or compare with the price of the product in markets where (or when) it were not patented. More directly measurable income is that which is received from the licensing or sale of patent rights, or from successful litigation of infringement.
, may fluctuate over time, as markets change. What was once a pioneering invention may be soon outsold by an unpatented (and non-patent infringement) competitor catering to fringe adopters with products having features even more desirable than the invention. Contrarily, a strong patent grip could stagnate a narrow market as innovation is no longer justified, eventually resulting in reduced demand (for outmoded and over-priced products), and thus reduced patent value, as the market moves away.
A particularly difficult question of value arises where inventors/owners use their patents to extract other advantages without actually marketing the invention (e.g., cross-licensing of related patents to avoid litigation, or suppressing a technology that could compete with the owner's other products). How can one determine the value of a patented product (and the underlying patent) that has not actually been produced, let alone sold in any quantity? Furthermore, many products incorporate numerous patented inventions (owned or licensed), and may carry exclusive trademarks, making it difficult to attribute a specific value to an individual patent. Would the same invention be as valuable if owned and marketed under a weak brand?
In 2005, the European Commission published a comprehensive study of the value of patents for patent owners as well as for the European economy. The title of the survey was “Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?” Ref. The study was in part based on a survey of 20,000 patent owners who filed EPO patents between 1993 and 1997. The survey was performed in 2003. 9000 patent owners responded. The patent owners were asked how much effort was required to produce their inventions and how much monetary value their patents had been worth. The median effort to create the patentable invention was 1 person-year, with 10% of the patent owners requiring 2 or more person-years. The median value of the patents produced was €300,000, with 10% of patent owners reporting values of €10 million Euros or more.
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
instruments intended to encourage innovation
Innovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
by providing a limited monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
to the inventor (or their assignee) in return for the disclosure of the invention. The underlying assumption being innovation is encouraged because an inventor can secure exclusive rights, and therefore a higher probability of financial rewards in the market place. The publication of the invention
Invention
An invention is a novel composition, device, or process. An invention may be derived from a pre-existing model or idea, or it could be independently conceived, in which case it may be a radical breakthrough. In addition, there is cultural invention, which is an innovative set of useful social...
is mandatory to get a patent. Keeping the same invention as a trade secret
Trade secret
A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers...
, rather than disclose by publication, could prove valuable well beyond the time of any limited patent term, but at the risk of congenial invention through third party.
Economic benefits
Some research suggests rather than encouraging innovation, patents can hinder development, lower R&D investments, and decrease overall economic output. In these models, collaboration and information sharing has a strong impact on new product development and innovation.Macroeconomic perspective
The patent system has an impact on the economyEconomy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
as a whole. The benefits of new results, once the research
Research
Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...
is publicly known, are available to the whole economy in the relevant field, thereby bringing advantages to all parties in that field, though reducing the direct return to the party performing the pioneering research. This reduces economic incentive for a party to conduct research and innovate.
The effects of patents on a given market may vary widely according to the type of market, and whether there are other barriers to entry (e.g., business methods versus regulated medications).
Even in socialist monopole economies, the adherence to international patent laws was or becomes strict, as the effect is reciprocal for public economy, as soon as the level of technology development in these economies creates comparable advantage.
Microeconomic perspective
The economics surrounding a single patent, or group of patents, revolves around the balance between the expense of obtaining and maintaining the patent(s), and the income derived from owning that/those patents.The grant of a patent provides the inventor temporarily with an exclusive legal right, thereby securing a means to redeem the costs of research (by charging a higher price for its invention or by license fees from others who wish to practice it). Invention
Invention
An invention is a novel composition, device, or process. An invention may be derived from a pre-existing model or idea, or it could be independently conceived, in which case it may be a radical breakthrough. In addition, there is cultural invention, which is an innovative set of useful social...
is slightly advanced as people are encouraged to research and invent by the individual financial rewards of doing so.
A patent is an exclusionary right - preventing others from entering the market - and so its effect may be to increase the patent proprietor's income from that market. The major economic effect is the exclusivity period of the patent rights, when exploitation pays back for the enterprise that funded research and development
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...
. However, patenting alone does not guarantee for marketing success.
The right to exclude others from entering market with copies is, however, potentially extremely valuable as it can mean total exclusivity in that market for the duration of the patent (generally 20 years from filing). For example, worldwide sales of a patented pharmaceutical can be millions of dollars per day, whereas the generic equivalent sells for less than half the price. A good example of the financial rewards available to the small business from excluding large competitors from a market is the success of the Dyson
Dyson (appliances)
Dyson Ltd is a British technology company, founded in 1992 by Sir James Dyson, which designs and manufactures vacuum cleaners, hand driers, bladeless fans and heaters. It sells machines in over 50 countries and employs 3,100 people worldwide. The company prides itself on engineering products which...
vacuum cleaner.
Income improvement from a patent is difficult to measure. One may attempt to measure the difference in price of an "improved" product patent, or compare with the price of the product in markets where (or when) it were not patented. More directly measurable income is that which is received from the licensing or sale of patent rights, or from successful litigation of infringement.
Patent valuation
Patent value, like value of other propertyProperty
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
, may fluctuate over time, as markets change. What was once a pioneering invention may be soon outsold by an unpatented (and non-patent infringement) competitor catering to fringe adopters with products having features even more desirable than the invention. Contrarily, a strong patent grip could stagnate a narrow market as innovation is no longer justified, eventually resulting in reduced demand (for outmoded and over-priced products), and thus reduced patent value, as the market moves away.
A particularly difficult question of value arises where inventors/owners use their patents to extract other advantages without actually marketing the invention (e.g., cross-licensing of related patents to avoid litigation, or suppressing a technology that could compete with the owner's other products). How can one determine the value of a patented product (and the underlying patent) that has not actually been produced, let alone sold in any quantity? Furthermore, many products incorporate numerous patented inventions (owned or licensed), and may carry exclusive trademarks, making it difficult to attribute a specific value to an individual patent. Would the same invention be as valuable if owned and marketed under a weak brand?
In 2005, the European Commission published a comprehensive study of the value of patents for patent owners as well as for the European economy. The title of the survey was “Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?” Ref. The study was in part based on a survey of 20,000 patent owners who filed EPO patents between 1993 and 1997. The survey was performed in 2003. 9000 patent owners responded. The patent owners were asked how much effort was required to produce their inventions and how much monetary value their patents had been worth. The median effort to create the patentable invention was 1 person-year, with 10% of the patent owners requiring 2 or more person-years. The median value of the patents produced was €300,000, with 10% of patent owners reporting values of €10 million Euros or more.
See also
- Business method patentBusiness method patentBusiness method patents are a class of patents which disclose and claim new methods of doing business. This includes new types of e-commerce, insurance, banking, tax compliance etc. Business method patents are a relatively new species of patent and there have been several reviews investigating the...
- PatentabilityPatentabilityWithin the context of a national or multilateral body of law, an invention is patentable if it meets the relevant legal conditions to be granted a patent...
- Intellectual property valuationIntellectual property valuationValuation is considered as one of the most critical areas in finance; it plays a key role in many areas of finance such as buy/sell, solvency, merger and acquisition...
- Software patent debateSoftware patent debateThe software patent debate is the argument dealing with the extent to which it should be possible to patent software and computer-implemented inventions as a matter of public policy. Policy debate on software patents has been active for years. The opponents to software patents have gained more...
- Sufficiency of disclosureSufficiency of disclosureMost patent law systems require that a patent application disclose a claimed invention in sufficient detail for the notional person skilled in the art to carry out that claimed invention. This requirement is often known as sufficiency of disclosure or enablement, depending on the...
External links
- Economic Development and Patents and Competition and Patents on the WIPOWorld Intellectual Property OrganizationThe World Intellectual Property Organization is one of the 17 specialized agencies of the United Nations. WIPO was created in 1967 "to encourage creative activity, to promote the protection of intellectual property throughout the world"....
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